Robert Silberman - Executive Chairman Karl McDonnell - Chief Executive Officer Daniel Jackson - Executive Vice President and Chief Financial Officer.

Peter Appert - Piper Jaffray Jeffrey Silber - BMO Capital Markets Corey Greendale - First Analysis Trace Urdan - Credit Suisse.

Good morning, everyone, and welcome to Strayer Education, Inc's Fourth Quarter 2016 Earnings Results Conference Call. This call is being recorded. For those of you who wish to listen to the conference via the Internet, please go to strayereducation.com where the call will be archived.

With us today to discuss the results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following Strayer's remarks, we will open the call for questions and answers.

I would like to remind everyone that today's press release contains, and certain information on this call may contain statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act.

Those statements are based on the Company's current expectations and are subject to a number of assumptions, uncertainties and risks that the Company has identified in the paragraph on forward-looking statements at the end of its press release, and that could cause the Company's actual results to differ materially.

Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. Copies of these filings and the full press release are available online and upon request from the Company's Investor Relations department.

And now, I'd like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead..

Thank you, operator, and good morning ladies and gentlemen. We are going to begin this morning with Karl discussing our company's operating results for the fourth quarter. Again, we will then report our financial results for both the fourth quarter and the full year of 2016 and I will conclude with some comments on capital allocation.

And after we are done, we will stay for as long as you have questions.

Karl?.

Thank you, Rob. Good morning, everyone. I would like to begin this morning by offering some comments on the three main drivers of our financial performance which is our enrollment, our revenue per student and our operating expenses. First, regarding our enrollment.

With the winter term enrollment results that we announced this morning and which I will provide a little more color on here momentarily. We have now grown our total enrollment for the past seven consecutive quarters.

In 2016 our total enrollment growth averaged 3% and improved sequentially in every quarter throughout 2016 ending with the 6% growth that we had in the fourth quarter.

That growth was driven in part by increases that we have had in our new students but more substantially from the gains that we had in student retention, which has improved on a year-over-year basis every year since 2013.

These improvements are the result of the many investments that we have made in our academic programs and services over the years and while we don’t provide a forecast on future enrollments, we are very confident the improvements in our teaching capabilities will continue to improve both student learning outcome and retention over the long term.

Second, with regard to revenue per student. The 120 basis point decline we had in 2016 was essentially right in line with our expectations and at this point nearly all of our undergraduate students are on the reduced undergraduate tuition that we implemented in the fourth quarter of 2013.

Notwithstanding this fact, it is still possible that we could see a slight decline in revenue per student of between 50 and 100 basis points in 2017 due to other factors such as growth in our degrees at work students, which have lower tuition levels, as well as a continued mix shift to undergraduate students who have slightly higher drop rates.

Turning now to our operating expenses. The 5.2% increase in 2016 was attributable to our decision midway through last year to accelerate our investments in our various growth initiatives.

Those investments are now in our current expense run rate which we anticipate to be between $96 million and $98 million per quarter in 2017 barring increased variable expense associated with substantially higher enrollment. One last point on our expenses.

In the first quarter of last year, our operating expenses were $91 million or roughly $4 million below the run rate we had at that time. The lower expenses last year were attributable to a onetime gain in lease related accounting as well as the timing of some various expense items.

So on a comparative basis, when we report our 2017 first quarter financial results later this year, it will show a negative variance to prior year on operating expenses of roughly 8%. That variance will normalize due to the balance of 2017.

Based on that variance as well as some of the variability in our tax rate which Dan will comment on in a minute, we expect to report a double-digit decline in EBIT in the first quarter.

However, subject to our current enrollment trends continuing, we would also expect to report double digit gains in EBIT for quarters two, three and four, as well as for the full year. Just a few other comments on our operational results. For the winter term we had an 8% increase in new students.

A 6% increase in continuing students and our national account students increased 10%. That resulted, as I said momentarily ago, a 6% growth overall. Regarding the Jack Welch Management Institute, they continue to do very well.

They had new student growth of 27%, increased their continuation rate by 270 basis points to roughly 95%, and for the winter term, we also implemented a 6% tuition increase for new JWMI students. And lastly, we were pleased this morning to announce that Strayer University's President, Brian Jones, was appointed by U.S.

Speaker of the House, Paul Ryan, to serve on the National Advisory Committee on Institutional Quality and Integrity or NACIQI. A public body that serves to advise the U.S. Secretary of Education on matters of accreditation and matters regarding institutional eligibility for federal student aid.

Dan, can you review the numbers?.

Sure. Thank you, Karl, and good morning everyone. I will start with revenue which for the fourth quarter was $119.3 million, an increase of 5% from 2015. The increase was driven by 6% enrollment growth for the fall term, partly offset by lower revenue per student which was down 1%.

The decline in revenue per student was primarily related to the continued shift in our enrollment mix to undergraduates paying our lower tuition rate. Our income from operations was $19.7 million compared to $21.7 million for the same period last year.

Our income from operations in the fourth quarter includes a $1.3 million non-cash benefit resulting from our adjustment of the value of the contingent liability related to our acquisition of the New York Code and Design Academy. Excluding this adjustment, our income from operations for the quarter was $18.4 million.

Our operating margin was 15.4% for the quarter, excluding the non-cash adjustment compared to 19.1% in 2015. Bad debt expense was 4.6% for the quarter compared to 3.3% for the same period last year. Net income for the quarter was $11.7 million, or $10.5 million excluding non-cash adjustments, compared to $13 million in 2015.

Diluted earnings per share for our fourth quarter was $1.07 or $0.95 excluding non-cash adjustments, compared to $1.21 for the same period in 2015. Diluted shares outstanding increased to 10,971,000 from 10,782,000 for the same period in 2015. Moving on to our full year results.

Total enrollment for the year was up 3% while average revenue per student declined by about 1%, contributing to a 2% increase in total revenue to $441.1 million. Income from operations was $57.5 million for the year compared to $69.7 million in 2015.

Excluding non-cash adjustments, income from operations was $54.3 million in 2016 and $69.3 million in 2015. Excluding the non-cash adjustments, our operating margin for the year was 12.3% compared to 15.9% last year and net income was $34.8 million for the year compared to $40.0 million in 2015.

Excluding non-cash adjustments, net income was $32.3 million this year compared to $39.8 million in 2015. Earnings per share for 2016 was $3.21 compared to $3.73 last year, a decrease of 14%.

Excluding non-cash adjustments, EPS was $2.98 this year compared to $3.70 last year and our diluted weighted average shares outstanding for the 2016 increased to 10,845,000 from 10,740,000 in 2015. A quick note on our tax rate.

Our higher effective tax rate of 40.3% for Q4 was the result of a true up to our provision to account for non-deductible and non-cash expenses associated with the purchase accounting for our NYCDA acquisition.

In 2017 we expect our tax rate to be about 39.5%, though likely slightly higher in Q1 as we adjust for new accounting rules regarding the tax treatment of share-based compensation. Moving to the balance sheet. We ended the year with $129.2 million of cash and no debt.

We generated $44.5 million in cash from operations during the year compared to $77.5 million in 2015. And as I have mentioned in the last few quarters, cash flow from operations this year was impacted negatively by a few trends that should have a reduced impact on 2017.

These include our investment in NYCDA, of which a portion was treated as a reduction of operating cash flow, higher non-cash benefits associated with the sublet of facilities we closed in late 2013, and the unfavorable timing of cash tax payments and other payables.

As the impact of these trends recedes in 2017, we expect the increase in our cash flow from operations to be more in line with earnings. Regarding CapEx, we spent $13.2 million during 2016 compared to $12.7 million in 2015. We expect CapEx in 2017 to be slightly higher than in 2016 and in the range of 3% to 3.5% of revenue.

And finally, we continue to maintain $150 million in available credit on our revolver.

Rob?.

Thanks, Dan. I have got just a few comments on our capital allocation and I will tread over some of the same material that Dan has covered but from the standpoint of the way the board and I as owners think about the business. So in 2016 we started the year with $107 million in cash on our balance sheet.

During 2016 we generated $76 million in pretax cash flow from operations. That’s what the business produced. We used that cash during the year as follows. First, we paid $32 million in federal state and municipal taxes.

It's our largest single use of operating cash flow and at our high effective cash tax rate of over 40%, it's pretty clear that reduction in corporate tax rates would be very valuable to our enterprise. We don’t make decisions on the basis of what may happen but we have it in the back of our mind that that could be a significant upside.

Second, we invested $13 million, as Dan said, in academic technology, routine maintenance and CapEx. Third, we paid $9 million to acquire the New York Code and Design Academy and finally we retained the remaining $22 million, leaving us at year-end 2016, as Dan described, $129 million of cash on our balance sheet.

No debt and roughly 11 million diluted shares outstanding. Now during 2017, we will use some of our owners cash. That $129 million that we started the year with plus the surplus capital we intend to generate during the year.

We are going to give some of that to invest in our continuing efforts to improve our students' academic performance, as well as to fund other strategies to grow the intrinsic value of our enterprise. But as Karl mentioned, our expense budget is relatively fixes right now except for variable costs and we have a pretty good idea of what that is.

Now, given the strength of our balance sheet and the anticipated growth of our business during the year, our board of directors feel it's appropriate to reinstate our annual common dividend at $1 per share in 2017 to be weighed quarterly starting on March 20, here in the first quarter.

We do not anticipate that this dividend will utilize more than 20% to 30% of our distributable cash flow in 2017, even at the current corporate tax rates, which we feel will leave us with plenty of financial resources to fund both our increased growth as well as take advantage of any external opportunities which may present themselves during the year.

And of course we will analyze and judge those external opportunities, the same way we do our internal opportunities as what's the highest return for our owners for the use of our cash.

And as Karl has described, what we have found over the last couple of decades almost of running this enterprise is that over time, the best use and highest return use for our owners is investing in the improved academic outcomes of our students and we are going to start to harvest some of that here in 2017 as these higher retention rates start to flow through our income statement.

And with that, operator, we will be pleased to answer any questions..

[Operator Instructions] Our first question is from Peter Appert of Piper Jaffray. Your line is open..

Rob or Karl, can you give us any color on the momentum you are seeing at the Coding Academy?.

Sure, Peter. We are seeing quite a bit of interest on several new programs that we just launched at the tail end of 2016. It's still very small and proportionately a tiny part of our income statement. But we are pleased with the interest that we are seeing..

Well, actually it was more than a tiny part for '16 as that has such a diluted impact but what we are hoping is it will be a small part for '17. Yes..

Can you quantify those numbers then, in terms of what the investment last year was and what the expectation for next year might be?.

Sure. We had roughly $0.50ish dilution in 2016. We expect to do substantially better than that in 2017 and we have kind of set a stretch goal to get it to zero dilution, actually..

In '17?.

In '17..

Got it.

And it is possible to share with us what the current enrollments look like and just the trajectory you have seen in that?.

Well, it depends on the number of classes that we teach and depending on whether it's a full time class or a part time class, any one of them will have between, say 15 and 30 students. And we try to run, call it three or four of those a month per site. But it's very early still, Peter.

So it's something obvious that we are going to be tracking closely throughout this year..

And you are in nine locations currently, correct?.

We are in nine. Although one of the things that we have done in 2017 is we are really trying to concentrate our marketing resources on the more established sites that are predominantly on the east coast. And that would be sites like New York, Amsterdam actually, which is way east coast, and Philadelphia.

That’s where a lot of the demand is concentrated right now..

Got it. And then on the cost side of the equation, the ability to keep costs flat even as you are building out NYCDA and some of these other programming initiatives.

I am impressed with that obviously, but I am just wondering how you are able to execute on that?.

Well, part of it is just the investments that we have made throughout, call it the last few years. Some of those expenses were onetime in nature. They are not going to repeat. Some of them are needed to sustain the ongoing performance of, be it NYCDA Strayer work or the university itself.

It's just a combination of the timing of those expenses, Peter, as well as our ability find productivity savings as we go through the year..

Understood.

And last thing, any comment on the increase in the bad debt expense this year?.

Yes. Peter, that was really a reflection of the increase in the fourth quarter of new undergraduate students who play slightly, at a slightly lower rate than the rest of our students..

Thank you. Our next question is from Jeff Silber of BMO Capital Markets. Your line is open..

I appreciate the color regarding operating expenses for the current year. Can you just remind us in terms of the variable cost impact on kind of what the incremental margins on new student when you get them or new group of students..

Sure, Jeff. We believe that it depends frankly on the modality of the students. It's a different cost structure on ground versus online and we have seen a shift from more and more of our students taking online instruction. But on a marginal basis, the contribution margin on an incremental student could be as high as 60%-70%..

Okay. Great. That’s helpful. And I think, Rob, when you were talking earlier you mentioned about the priorities for capital allocation and I think you used the term other strategies for growth.

Can you just give us a little bit more color what you are referring to?.

Well, you know the New York Code and Design Academy is I think a good example. We are looking for opportunities to diversify our revenue base in areas in addition to traditional university enrollment which comes with [title 4] [ph] revenue.

We look for areas where our ability to teach and our ability to achieve learning outcomes is generally, can be replicated. But we tend not to get too far afield from what we think we know we can do. One thing Karl didn’t mention is is that this year we have coming online -- we have been teaching in 2016 our RN to BSN program, our nursing program.

We expect to receive full accreditation for that in 2017. We hope to. And at that point, we expect that that program will grow significantly and will require some further investment. So it's both internal opportunities as well as external potential acquisition opportunities.

But they tend to be in the -- we focus on areas that we believe we bring some managerial expertise and that we can get above average returns..

Okay. Great. And then on the reinstatement of the dividend. It was great to see. Can you talk about it, is there a certain payout ratio that you are targeting. I am just wondering why you set the amount as a dollar for the year..

Well, it's a round number. But we do -- payout ratio is a part of the analysis that the board does. Now essentially what the board does is say, how much capital do we need to retain in the business to maximize the value of the business as well as have resources available should opportunities present themselves.

And then above that, what we have tried to do over the last 17 years is return capital to owners in the most value enhancing way. And we do have an outstanding share repurchase authorization and have in the past when we felt like the shares were trading at a significant discount to intrinsic value that that was one way to return capital to owners.

So the common dividend I think needs to be or is better thought of as a predictable base load of return of capital to owners and it works out, in this year that as I said, it will be dependent on how well we perform but somewhere between 20% and 30% of distributable cash flow.

That means you have got another 70% to 80% which is available to use for other purposes to grow the business that they come up during the year.

Potentially increased return of capital to owners or as the business expands, which I mean I think the simplest way to describe it is, we have been dealing with what has been a shrinking business for about five years, we expected it to be an expanding business.

And having an expanding business I think requires or is certainly behooved to have additional financial capital around to be able to take advantage of opportunities that comes within expanding business..

Okay, great. And if I could just sneak in one number question.

The non-cash adjustment to the contingent liability, was that in the general and administrative expense line?.

No, it's up in I&E..

Okay. Great.

And that was $1.3 million?.

Yes..

Our next question is from Corey Greendale of First Analysis. Your line is open..

I also had a question related to the dividend and congratulations on reinstating that. So I assume that has some indication of the board's confidence. And in that context, what are your thoughts on whether you are getting closer when you might evaluate the old geographic expansion..

Well, couple of thoughts on that and then I will turn it over to Karl, who has actually got a team that is focused on that. The decision to stop the geographic expansion model was informed by factors which are related to our decision with regard to the dividend but they are not exactly the same.

In other words, I went through with Jeff sort of our thinking with regard to capital which is returned to owners. The geographic expansion model, capital that would be used in that would be invested in the business, so to speak. So from that standpoint it's really a question of, is it a helpful way for us to both attract and serve students.

And as, I will let Karl go through the details. Our student population in terms of the way in which they desire to access the academics is shifting significantly over the last five years. Go ahead..

Yes. Corey, one of the interesting things that we see with our campuses is that just about every measures that you can look at, including academic measures, like course completion rate and pass rate and so forth. Those are all better for students that are affiliated with our campuses versus an out of area student.

And that’s true even for students who have taken all of their classes on line. They have never taken an on ground class.

And what we have hypothesized is that that may have something to do with the selection criteria by us on the part of the student that they are seeking an institution that has the flexibility to allow you to learn in an offline setting if you chose to do that. So we know that the campuses have value for us. We can measure that.

To Rob's point, we have seen a pretty dramatic shift in modality preference where 80 plus percent of our seats in any given term are being taught on line. The implication of that is clearly that while we think we need and want physical campuses, they don’t need to be of the size that they have historically been, say in the 15,000 square foot range.

And we do have a team of people that is sort of researching and identifying what we are calling our campus of the future, which is likely to be substantially smaller. And once we get that plan set, we will test it in a market to just to see how it goes.

But I certainly do foresee a time when we will begin opening new campuses albeit in a different format. And we look forward to that happening and obviously once it does, we will make an announcement on it..

That’s really interesting and good details. Does that imply, if that works, that would have implications for the existing footprint that you might look to transform the campuses that are passed into campuses of the future..

Yes. It does. An in any given year we will have between five and ten campuses whose lease is coming up for renewal and as part of that we will definitely make use of, trying to get much smaller space..

And Corey, if you think about it from a capital standpoint, to put a finer point on it. What Karl just said is that over the next five years we have got several million dollars a year of reduced lease expenses that we expect to flow through the income statement as we make this transformation.

On the other hand, he is making a lot of investments in improving the caliber of the online classes that we have. I mentioned in last year's letter to shareholders our Strayer Studios where we are essentially creating production operations to build these online classes that are significantly better. They are more engaging then our previous ones.

So some of that capital will be redeployed back into improving the caliber of our online classes because as we have said continually, ultimately we want to have the best academics available for the students in the way in which they want to access the academic content..

Okay. That makes sense. I had a couple of more questions. Trying not to take advantage of your point about staying as long as we need for questions. On the guidance on the expense, so ordinarily there is more than $2 million swing between the lowest quarter on OpEx and the highest quarter.

So do you think you are going to be in this kind of $96 million to $98 million range every quarter of 2017..

It’s possible at any one quarter, Corey. We might be a tip below, maybe just slightly above. But based on what we know, we plan to spend, we have pretty detailed plans on that. I am pretty confident that it will be between the $96 million and $98 million per quarter..

And Karl, when said barring increased variable expense associated, I think you said with meaningfully higher enrollment.

If you keep growing enrollment kind of in the 6%-7% range, would that be covered under the 96 to 98 or would that be not very...?.

No. That was precisely the point I was trying to make that if the current enrollment trends continue that we have seen recently, the 96 to 98 would be relevant. If for some reason our enrollment started to grow substantially more than that, obviously we are going to have to add instructional expense on top of that..

Okay. Good. And then a couple of points. In the call you sort of alluded to the fact that it sounds like bachelor enrollment got better. So I was just hoping you could give some color on sort of relative enrollment trends in bachelor versus graduate degrees and also what you saw specifically through the corporate channel..

Yes. Sure. I don’t have the specific number in front of me although I do know that our growth was entirely driven by undergraduate students, aided in part by the Strayer work students that we get. The degrees at work students that we get. Our new graduate enrollment decline, I don’t have the precise number in front of me Corey.

That’s something that we have seen on and off for the last several quarters. Our new undergraduate enrollment was up in excess of 15% and it's a combination of the b2b channel which again I said was up in total about 10% in the quarter. But I think it's fair to say that we have seen a very improved sort of demand environment.

Our enquiry volumes organically are up substantially. That’s been the case really for the last three to four quarters. So I think it's a combination of the continued strength in our corporate channels as well as just an overall improving economy and perhaps labor market..

And I would definitely, Corey, emphasize that last statement. I mean if you think back over the last five years, where we took the biggest hit in 2011 and '12 and '13, was in our unaffiliated undergraduate students.

And that was co-incident with [purative] [ph] declining labor participation rates and just lower consumer confidence and economic confidence. And or prospective undergraduate students were the ones who took it in the teeth the most during that timeframe.

I think over the last 12 months that the economy is not getting a lot better but it's not getting worse. And it definitely feels like it's firming somewhat to us now.

At the graduate level because those students had college degrees, they didn’t go down as much and during that timeframe they actually kind of helped us through a little bit of that trough. And now they are sort of plugging along and it's the undergraduate enrollment which has really kicked up over the last 12 months..

Thank you. Our next question is from Trace Urdan of Credit Suisse. Your line is open..

I want to go back to NYCDA and the comment that you were sort of aiming to maybe breakeven next year. I guess my question is, is that really the right approach for a business that seems to be still in its early stages. I think that’s how you think of it and why you got into it.

And I am wondering whether breakeven in 2017 as a goal might represent underinvestment in that business.

And I am wondering how you think about that dynamic?.

Yes, Trace, I actually don’t think breakeven is our goal. I think one of us, either Karl or I, was trying to answer the question specifically about what the financial outcome would be. In other words, being breakeven in 2017 would be more of a result of achieving the goals that we have for the business.

And as Karl mentioned, we took a business that was very very small and in just one location. And over a 12-month period both standardized a lot of its processes and procedures to make sure that it complied with the regulatory concerns that we have and then rolled it out over a number of locations.

The gating factor for us and the objective of the business for us is to achieve very high learning outcomes across all of those locations. And we have sort of pegged the growth rate at those locations at a rate at which we are confident that Jeremy and his team can execute and get those high learning outcomes.

If that happens, I suspect that the result will be that it's roughly breakeven versus the significantly dilutive amount in 2016. If it does happen and we are confident that we can do it at higher rates of growth, we are happy to do that in '18 and going forward. Even if it does create some more dilution.

If it's creating the kind of top line growth and the ability to expand the business in a way that’s value enhancing to our owners over time. But in the short run we think that that’s about as much as we are prepared to bite off and not put a risk to learning outcomes..

Okay. Fair enough. So as a follow up question then, clearly this is sort of a first step in the process of trying to diversify your sources of revenue away from [title 4] [ph] and you made a comment earlier to suggest that there might be some others that you are looking at.

So without kind of giving us any trade secrets here, could you comment on what you think are the sort of the core skills or the core competencies, to use the hackneyed phrase, that you can lever into other areas.

Because clearly, NYCDA, it sounds like it's promising but it also sounds like it's going to be a while before it's really material to your overall earnings. And so how shall we think about what other places you might go to further that goal of diversification..

Sure. But again, I would emphasize going from costing you about $0.50 to roughly breakeven is material given the size of our earnings. But again that’s not the--.

Yes. I was speaking more about the top line..

Got it. But the -- at its simplest level, we are an educational institution. We are a teaching institution. Whether that takes the place of traditional university education, things that we have in place that are more geared towards specific job preparation.

Things that we are doing for some of our corporate customers that really sort of morph into almost corporate training and employee skill development. And then things like Code Academy which are a combination of the both.

Those are the kinds of things we look for because we think that’s what we have done well for a long period of time and we think we can do well. I wouldn’t say that there is a long list of imminent targets out there. I tried to answer the question on capital with regard to what's possible.

But I would say, when I look at this business right now Trace, for the first time in several years, the core business, Strayer University is on the verge of growing at all levels. Top and bottom line.

And having navigated through a pretty serious economic downturn, that is a fair amount of our focus over the next couple of years to make sure that all of the investments that we have made in academic performance in a more benign economic environment are harvested for the benefit of both the institution and our owners.

And Karl, maybe you should talk a little bit more about the Strayer work and some of the other non....

Yes. Trace, I think if we were to approach and answer to your question thematically, we are trying to further inform our prospective around where the labor market is going, five, ten plus years out. Where we see job growth. Clearly, I think it's universally acknowledged there is a going to be shortage of coders which is why we were interested in NYCDA.

And through the Strayer work arm, we are constantly talking to our corporate partners about the kinds of things that they are interested in. And they are around employee skill development. Some of it is around how can you bring superior online instruction inside of companies. That seems to be a very hot topic right now.

And so we are actively engaged with several of our very large clients building essentially online universities but embedded in a company. And that’s where we want to sit. We want to position ourselves between students as a consumer but also in between companies who are ultimately the purchasers, if you will, of that talent.

We try to iteratively inform ourselves around what companies are interested in, not just from a skill standpoint but also from a technology standpoint and be a partner to them that we can assist them in sort of hitting their goals..

Okay. That’s helpful. Last question from me. Rob, you made reference to the ongoing effort to sort of upgrade the online experience and Karl you know I am a big fan of that.

And I also know that it's a gradual process and expensive, but is there some point in the future where you will have enough of your online courses kind of revamped with that sensibility where it could become something where it could start to impact the growth rates where it might be something that you would actively market to prospective students.

Can you talk about that?.

Sure. We are very thrilled with the work that’s been done. You will recall our theory on this was, it doesn’t matter how good your adaptive learning engines are. It doesn’t matter how good the predictive analytics are, if people won't interact with the material.

And we were guilty like every institution in the world of having online content that was not that engaging. So we stood up an internal film studio. We hired executive producers from the industry, directors, writers. Paired them with academic experts and instructional designers and we have created this new online format course.

We have tested it twice in our fall academic term, in a small pilot of a couple of thousand students versus the controlled group of the rest. Everything you would want to see better was better and by a pretty significant. Our goal is to have 8 to 10 of our highest volume courses remade into this format during 2017.

So we will have more than 10,000 students going through these new courses during the course of the year. We are very optimistic. It's going to have a favorable impact. We absolutely will market it and tell the story of why we think this is a good use of capital. It is expensive initially, Trace, because you have got to stand up this team.

But as they start building more digital asset, we can deploy those with more scale and over time the cost to produce these will begin to subside and the cost will more then be offset by the gains that we have seen, if you just extrapolate our pilot and even discount it and assume that you don’t get the same level of gains across the university even if you discount that down, it will be more than enough to offset the expense that we have invested in it, in retention..

Right.

So thinking about it financially, maybe accretive in 2018?.

Well, I think it's accretive..

Yes. It should be accretive in '17 and certainly in '18. And I know you have had some interest in this. I am happy -- I have got a link that I can send you that will give you a preview of 8 to 10 of these little small stories that we embedded in the courses and give you a sense for what they look like. I can do that after the call..

And Trace, just to -- I was going to put this in my letter to shareholders which should come out in a couple of weeks. But we will do an investor day in October and around the time of our third quarter release.

And by that time I think Karl and his team will have enough of this that we can show it to everybody and get a sense for how powerful it is, both academically and then how that translates into the economic performance..

Thank you. At this time there are no other questions in queue. I would like to turn it back to Mr. Silberman for any closing remarks..

Thank you, operator, and thank you very much ladies and gentlemen. We will look forward to talking to you again at the time of our annual meeting. And, of course, if owners have any other questions, please give us a call and certainly stop by one of our campuses. That’s the best way to due diligence. Thank you very much..

Ladies and gentlemen, thank you for your participation in today's call. This concludes the program. You may now disconnect. Everyone have a great day..